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Chinese bond market: analysis of price information

Chinese bond market: analysis of price information. Wang Jiang State University Higher School of Economics Moscow. Contents:. Chinese Bonds Market Overview. Zero-coupon yield curve used by China Government Securities Depository Trust & Cleaning Co., Ltd.

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Chinese bond market: analysis of price information

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  1. Chinese bond market: analysis of price information Wang Jiang State University Higher School of Economics Moscow

  2. Contents: • Chinese Bonds Market Overview • Zero-coupon yield curve used by China Government Securities Depository Trust & Cleaning Co., Ltd • Applying EFFAS-EBC methodology to Chinese bond market

  3. Market overview • About 3946 bonds with total worth 44 526,7 billion RMB issued since 1998 • Currently traded: 1912 bonds with outstanding amount 18 508 billion RMB • About 1000 transactions a day with average daily turnaround about 160 billion RMB • Bonds are traded at SSE, SZE, OTC and inter-bank markets

  4. Market Structure

  5. Market Structure

  6. Outstanding Amount Source: http://www.chinabond.com.cn

  7. Present Instruments • Treasure Bonds (Ministry of Finance). • All terms. Bullet redemption. Majority has coupons. • Central Bank Bills (Peoples Bank of China). • Very short and short term. Majority are discounted. • Bonds Issued by Government-Owned Banks • All terms. Majority has coupons. Some have options. • Corporate and Commercial Banks Bonds • Others

  8. Non-Governmental Credit Bonds 2009 Bond Issuance Non-Governmental Credit Bonds Source: Chinabond Source: Wind Info

  9. Current position: • Chinese Bonds Market Overview • Zero-coupon yield curve used by CGSDTC • Applying EFFAS-EBC methodology to Chinese bond market

  10. History of Yield Curves Development in China • Research Stage(1999-2001): The first treasury bond yield curve was created under the Discounted Cash Flow (DCF) method. • Development Stage (2002-2005): Four yield curves, i.e. Inter-bank Treasury Bond, Exchange Treasury Bond, Treasury Bond (compounded) and Floating interest rate Treasury Bond, and Indices for Treasury Bond (Inter-bank and Exchange) were worked out by CGSDTC. The method of quadratic polynomial was adapted at this stage . • Initial Application Stage (2006-now): CGSDTC has worked out a wide variety of yield curves and indices; the study and analysis for bond pricing are rapidly improved.

  11. Chinabond yield curves structure

  12. CGSDTC Current Methodology • Data Filtering • Expert and Historical Estimates • Hermite Polynomial Fitting

  13. Data Sources • Deals Prices from OTC, Shanghai and Shenzhen Exchange markets • Bid – Ask Quotes from Interbank market • Market participants estimates

  14. Data Filtering In June 18, 2007 the data price contains T-bond 040007, YTM = 4.19, yield = 2.71%. The yield is much lower than the last working day (June 15, 2007). With the same YTM T-bond yield was 3.57% and 040007 is below the yield of 030007 (3.36%) with the YTM = 3.175 years. So, this data is anomaly.

  15. Hermite Polynomial Fitting • Fix bonds maturity dates as grid nodes x = - YTM • Fit Hermite polynomial such that: a) Bond pricing equation holds P – Bond price, A – Accumulative coupon income, F – Nominal bond price, t – Moments coupon payment, b) Yield expert estimates are recovered

  16. Result of Matlab simulation

  17. Current position: • Chinese Bonds Market Overview • Zero-coupon yield curve used by CGSDTC • Preliminary study of the Chinese bond market

  18. Data Sources • Daily trading results • Bid – Ask Quotes from 8 banks: • Industrial and Commercial Bank of China • Agricultural Bank of China • Bank of China • China Construction Bank • Bank of Beijing • China Merchants Bank • China MinSheng Bank • Bank of Nanjing

  19. Quotes co-Movement

  20. Bid-Ask Spread co-Movement

  21. Quotes: peculiarities • Data contains errors: Bid > Ask • Quoted YTM corresponds to smth slightly less than the Ask quote • Bid-Ask spread is far too wide • 4 banks quote all bonds, 4 banks quote only a subset.

  22. “Best” inter-bank Bid-Ask spreads

  23. Quotes: Yield Curves EFFAS-EBC meeting, June 2009

  24. Quotes: (Bid+Ask)/2

  25. Quotes: Summary • Different banks use different quoting schemes: the way quotes move differs a lot • Either quotes are non-committing or banks are isolated from each other: systematic arbitrage is present • Bonds are likely to be quoted in groups by time to maturity.

  26. Prices: peculiarities • Highly illiquid market • Prices may lie well outside Bid/Ask quotes • Similar bonds are frequently priced unlike each other • No filtering helps since “unusual” prices tend to repeat in time

  27. Number of Deals

  28. Turnover

  29. Price vs. Bid-Ask

  30. Prices: Yield curves

  31. More smoothing

  32. Prices: Summary • Data from different sources are likely to be mixed • Yield curves should be constructed from quotes • Extremely illiquid market, price information is unreliable

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